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EXR > SEC Filings for EXR > Form 10-Q on 4-Nov-2013All Recent SEC Filings

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Form 10-Q for EXTRA SPACE STORAGE INC.


4-Nov-2013

Quarterly Report

Management's Discussion and Analysis

Amounts in thousands, except property and share data

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our "Unaudited Condensed Consolidated Financial Statements" and the "Notes to Unaudited Condensed Consolidated Financial Statements" appearing elsewhere in this report and the "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Form 10-K for the year ended December 31, 2012. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Statement on Forward-Looking Information." (Amounts in thousands, except property and share data, unless otherwise stated).

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report and the audited financial statements contained in our Form 10-K for the year ended December 31, 2012 describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.

OVERVIEW

We are a fully integrated, self-administered and self-managed REIT, formed to continue the business commenced in 1977 by our predecessor companies to own, operate, manage, acquire, develop and redevelop professionally managed self-storage properties. We derive our revenues from rents received from tenants under existing leases at each of our self-storage properties; management fees on the properties we manage for joint venture partners and unaffiliated third parties; and our tenant reinsurance program. Our management fee is equal to approximately 6% of total revenues generated by the managed properties.

We operate in competitive markets, often where consumers have multiple self-storage properties from which to choose. Competition has impacted, and will continue to impact, our property results. We experience seasonal fluctuations in occupancy levels, with occupancy levels generally higher in the summer months due to increased moving activity. Our operating results depend materially on our ability to lease available self-storage units and actively manage rental rates, and on the ability of our tenants to make required rental payments. We believe we are able to respond quickly and effectively to changes in local, regional and national economic conditions by centrally adjusting rental rates through the combination of our revenue management team and our industry-leading technology systems.

We continue to evaluate a range of new initiatives and opportunities in order to enable us to maximize stockholder value. Our strategies to maximize stockholder value include the following:

Maximize the performance of properties through strategic, efficient and proactive management. We pursue revenue-generating and expense-minimizing opportunities in our operations. Our revenue management team seeks


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to maximize revenue by responding to changing market conditions through our advanced technology system's ability to provide real-time, interactive rental rate and discount management. Our size allows us greater ability than the majority of our competitors to implement more effective online marketing programs, which we believe will attract more customers to our stores at a lower net cost.

Acquire self-storage properties from strategic partners and third parties. Our acquisitions team continues to pursue the acquisition of single properties and multi-property portfolios that we believe can provide stockholder value. We have established a reputation as a reliable, ethical buyer, which we believe enhances our ability to negotiate and close acquisitions. In addition, we believe our status as an UPREIT enables flexibility when structuring deals. We continue to see available acquisitions on which to bid and are seeing increasing prices. However, we remain a disciplined buyer and look for acquisitions that will strengthen our portfolio and increase stockholder value.

Expand our management business. Our management business enables us to generate increased revenues through management fees and to expand our geographic footprint. We believe this expanded footprint enables us to reduce our operating costs through economies of scale. In addition, we see our management business as a future acquisition pipeline. We pursue strategic relationships with owners whose properties would enhance our portfolio in the event an opportunity arises to acquire such properties.

PROPERTIES

As of September 30, 2013, we owned or held ownership interests in 754 operating properties. Of these operating properties, 475 were wholly-owned and 279 were owned in joint venture partnerships. In addition, we managed 253 properties for third parties, bringing the total number of operating properties that we owned and/or managed to 1,007. These properties are located in 35 states, Washington, D.C. and Puerto Rico. As of September 30, 2013, we owned and/or managed approximately 74.0 million square feet of space with approximately 667,000 units.

Our properties are generally situated in convenient, highly visible locations clustered around large population centers such as Atlanta, Baltimore/Washington, D.C., Boston, Chicago, Dallas, Houston, Las Vegas, Los Angeles, Miami, New York City, Orlando, Philadelphia, Phoenix, St. Petersburg/Tampa and San Francisco/Oakland. These areas all enjoy above-average population growth and income levels. The clustering of assets around these population centers enables us to reduce our operating costs thfrough economies of scale. Our acquisitions and management business have given us an increased scale in many core markets as well as a foothold in many markets where we had no previous presence.

We consider a property to be in the lease-up stage after it has been issued a certificate of occupancy, but before it has achieved stabilization. We consider a property to be stabilized once it has achieved either an 80% average occupancy rate for a full year measured as of January 1, or has been open for three years.

As of September 30, 2013, over 575,000 tenants were leasing storage units at our 1,007 operating properties, primarily on a month-to-month basis, providing the flexibility to increase rental rates over time as markets permit. Although leases are short-term in duration, the typical tenant tends to remain at our properties for an extended period of time. For properties that were stabilized as of September 30, 2013, the average length of stay was approximately 12.3 months. Existing tenants generally receive rate increases at least annually, for which no direct correlation has been drawn to our vacancy trends. The average annual rent per square foot for our existing customers at stabilized properties, net of discounts and bad debt, was $14.12 for the three months ended September 30, 2013, compared to $13.44 for the same period ended September 30, 2012. Average annual rent per square foot for new leases was $14.32 for the three months ended September 30, 2013, compared to $13.98 for the same period ended September 30, 2012. The average discounts, as a percentage of rental revenues, during these periods were 3.8% and 5.0%, respectively.

Our property portfolio is made up of different types of construction and building configurations depending on the site and the municipality where it is located. Most often sites are what we consider "hybrid" facilities, a mix of both drive-up buildings and multi-floor buildings. We have a number of multi-floor buildings with elevator access only, and a number of facilities featuring ground-floor access only.

The following table presents additional information regarding the occupancy of our stabilized properties by state as of September 30, 2013 and 2012. The information as of September 30, 2012, is on a pro forma basis as though all the properties owned and/or managed at September 30, 2013, were under our control as of September 30, 2012.


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Stabilized Property Data Based on Location



                                           Company             Pro forma             Company            Pro forma          Company        Pro forma
                                                                                  Net Rentable        Net Rentable       Square Foot     Square Foot
                                      Number of Units as   Number of Units as   Square Feet as of   Square Feet as of    Occupancy %     Occupancy %
                         Number of     of September 30,     of September 30,      September 30,       September 30,     September 30,   September 30,
Location                 Properties        2013 (1)               2012              2013 (2)              2012              2013            2012

Wholly-Owned
Properties
Alabama                           4                1,973                1,970             233,617             233,643            85.2 %          85.2 %
Arizona                          11                6,931                6,909             814,993             814,943            88.2 %          86.8 %
California                      103               76,054               75,881           7,899,688           7,922,672            87.6 %          85.6 %
Colorado                         11                5,353                5,265             658,730             660,845            94.6 %          92.5 %
Connecticut                       4                2,643                2,647             257,783             257,818            91.5 %          89.3 %
Florida                          46               31,504               31,548           3,423,478           3,419,678            88.8 %          86.1 %
Georgia                          17                9,240                9,195           1,176,907           1,176,071            90.0 %          89.7 %
Hawaii                            4                4,695                4,546             256,116             250,169            82.0 %          80.2 %
Illinois                         13                9,092                8,982             946,252             946,469            93.3 %          92.0 %
Indiana                           9                4,705                4,598             553,118             541,043            87.0 %          91.6 %
Kansas                            1                  503                  504              50,360              50,340            95.3 %          91.6 %
Kentucky                          4                2,155                2,150             254,015             254,115            92.3 %          93.1 %
Louisiana                         2                1,413                1,414             150,015             150,215            88.4 %          93.1 %
Maryland                         21               15,530               15,439           1,646,412           1,643,608            92.1 %          89.5 %
Massachusetts                    32               19,499               19,399           1,987,581           1,988,091            93.5 %          91.1 %
Michigan                          3                1,796                1,781             254,432             253,312            93.2 %          91.2 %
Missouri                          6                3,206                3,159             377,256             375,337            89.4 %          90.7 %
Nevada                            5                3,184                3,209             546,649             546,073            88.0 %          82.0 %
New Hampshire                     2                1,001                1,006             125,773             125,773            91.7 %          88.3 %
New Jersey                       45               35,368               35,419           3,420,539           3,420,105            92.9 %          90.1 %
New Mexico                        3                1,574                1,588             216,154             216,104            87.0 %          87.4 %
New York                         19               16,521               16,129           1,350,584           1,342,864            89.9 %          89.7 %
Ohio                             18                9,656                9,620           1,265,731           1,249,516            90.7 %          90.3 %
Oregon                            3                2,144                2,137             250,410             250,610            94.4 %          92.2 %
Pennsylvania                      9                5,719                5,721             648,915             649,855            91.1 %          90.6 %
Rhode Island                      2                1,181                1,181             131,281             130,836            92.8 %          89.3 %
South Carolina                    5                2,709                2,700             330,260             327,675            92.0 %          89.1 %
Tennessee                        10                5,482                5,427             754,030             739,599            88.6 %          87.2 %
Texas                            26               16,718               16,682           1,959,725           1,961,850            91.3 %          88.7 %
Utah                              7                3,532                3,529             444,231             444,696            92.8 %          91.9 %
Virginia                         11                7,491                7,490             758,522             757,861            90.3 %          90.5 %
Washington                        5                3,064                3,052             370,983             370,630            83.1 %          89.6 %
Total Wholly-Owned
Stabilized                      461              311,636              310,277          33,514,540          33,472,416            90.0 %          88.3 %


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                                           Company             Pro forma             Company            Pro forma          Company        Pro forma
                                                                                  Net Rentable        Net Rentable       Square Foot     Square Foot
                                      Number of Units as   Number of Units as   Square Feet as of   Square Feet as of    Occupancy %     Occupancy %
                         Number of     of September 30,     of September 30,      September 30,       September 30,     September 30,   September 30,
Location                 Properties        2013 (1)               2012              2013 (2)              2012              2013            2012

Joint-Venture
properties
Alabama                           2                1,147                1,147             145,198             145,243            90.4 %          89.9 %
Arizona                           7                4,224                4,206             492,841             493,471            89.8 %          87.2 %
California                       78               56,746               56,341           5,819,920           5,818,437            92.1 %          91.1 %
Colorado                          2                1,321                1,320             158,813             158,553            93.4 %          93.0 %
Connecticut                       7                5,294                5,299             611,470             612,445            91.3 %          90.0 %
Delaware                          1                  590                  588              71,705              71,680            90.9 %          91.6 %
Florida                          19               15,153               15,290           1,522,089           1,535,457            89.4 %          88.1 %
Georgia                           2                1,058                1,061             151,574             151,684            88.8 %          85.7 %
Illinois                          5                3,444                3,386             365,133             361,698            93.1 %          92.7 %
Indiana                           5                2,170                2,149             284,976             284,511            91.7 %          92.4 %
Kansas                            2                  842                  840             109,325             108,820            85.4 %          88.7 %
Kentucky                          4                2,228                2,289             254,899             270,013            89.5 %          92.4 %
Maryland                         12                9,693                9,634             954,395             949,070            92.2 %          91.7 %
Massachusetts                    13                6,899                6,873             782,667             776,952            92.4 %          89.3 %
Michigan                          8                4,777                4,747             611,803             612,118            92.2 %          92.1 %
Missouri                          1                  531                  532              61,225              61,275            91.4 %          92.6 %
Nevada                            5                3,047                3,042             326,933             325,423            88.7 %          83.6 %
New Hampshire                     3                1,305                1,309             136,674             137,024            86.6 %          90.0 %
New Jersey                       16               12,945               12,874           1,358,183           1,356,684            91.8 %          90.0 %
New Mexico                        7                3,602                3,607             398,225             397,874            87.2 %          83.7 %
New York                         13               14,132               14,075           1,106,171           1,105,611            92.8 %          91.7 %
Ohio                              8                3,959                3,939             531,312             532,187            91.8 %          91.8 %
Oregon                            1                  652                  652              64,970              64,970            92.4 %          95.6 %
Pennsylvania                     10                7,958                7,936             801,705             799,424            91.8 %          91.4 %
Tennessee                        17                9,346                9,262           1,238,282           1,214,836            90.3 %          87.9 %
Texas                            17               10,559               10,525           1,387,340           1,388,028            93.0 %          90.5 %
Virginia                         13                9,358                9,336             994,426             993,306            91.0 %          90.5 %
Washington, DC                    1                1,530                1,529             102,017             101,989            92.9 %          91.5 %
Total Joint-Venture
Stabilized                      279              194,510              193,788          20,844,271          20,828,783            91.5 %          90.3 %

Managed Properties
Arizona                           3                1,229                1,229             230,767             230,742            82.7 %          77.2 %
California                       60               40,227               40,319           5,316,888           5,303,302            78.1 %          75.1 %
Colorado                          7                3,455                3,458             386,613             386,326            93.8 %          94.1 %
Connecticut                       1                  478                  484              61,600              61,480            86.4 %          81.8 %
Florida                          27               15,756               15,709           1,888,451           1,878,807            83.4 %          82.5 %
Georgia                           9                4,623                4,621             703,203             701,353            86.9 %          82.7 %
Hawaii                            4                4,071                4,136             233,172             243,639            80.3 %          66.8 %
Illinois                         10                5,898                5,884             627,780             631,385            91.4 %          91.0 %
Indiana                           9                5,029                5,038             619,237             619,087            85.1 %          84.7 %
Kentucky                          1                  548                  530              67,268              66,100            87.6 %          93.4 %
Louisiana                         1                1,006                1,013             135,035             134,940            77.6 %          75.0 %
Maryland                          9                5,250                5,247             536,357             540,307            92.6 %          90.2 %
Massachusetts                     1                1,106                1,117             108,080             108,605            92.8 %          86.8 %
Mississippi                       1                1,203                1,203             165,635             165,635            73.7 %          73.7 %
Missouri                          2                1,210                1,206             152,611             151,716            90.5 %          83.2 %
Nevada                            2                1,558                1,562             170,025             170,575            80.2 %          75.9 %
New Jersey                        7                4,052                4,126             428,823             428,475            88.0 %          71.3 %
New Mexico                        2                1,120                1,107             131,472             132,262            91.7 %          91.3 %
North Carolina                   13                7,392                7,339             903,552             902,533            84.4 %          82.1 %
Ohio                             10                3,517                3,517             489,084             489,084            82.1 %          82.1 %
Pennsylvania                     16                7,806                7,832             927,321             929,269            86.7 %          84.3 %
South Carolina                    4                2,750                2,745             359,600             359,300            88.0 %          88.1 %
Tennessee                         3                1,506                1,503             206,530             206,465            87.7 %          87.5 %
Texas                            19                9,547                9,434           1,327,490           1,333,140            83.4 %          81.3 %
Utah                              1                  789                  795             136,005             136,005            86.7 %          76.0 %
Virginia                          4                2,511                2,475             258,556             255,033            83.7 %          80.8 %
Washington                        1                  474                  468              56,590              56,590            88.2 %          85.3 %
Washington, DC                    2                1,262                1,263             112,409             112,459            94.2 %          90.4 %
Puerto Rico                       4                2,718                2,799             287,757             288,903            80.2 %          78.5 %
Total Managed
Stabilized                      233              138,091              138,159          17,027,911          17,023,517            83.3 %          80.5 %

Total Stabilized
Properties                      973              644,237              642,224          71,386,722          71,324,716            88.8 %          87.0 %



(1) Represents unit count as of September 30, 2013, which may differ from unit count as of September30, 2012 due to unit conversions or expansions.

(2) Represents net rentable square feet as of September 30, 2013, which may differ from rentable square feet as of September 30, 2012 due to unit conversions or expansions.


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The following table presents additional information regarding the occupancy of our lease-up properties by state as of September 30, 2013 and 2012. The information as of September 30, 2012 is on a pro forma basis as though all the properties owned and/or managed at September 30, 2013 were under our control as of September 30, 2012.

Lease-up Property Data Based on Location



                               Company     Pro forma     Company    Pro forma      Company        Pro forma
                                                           Net         Net
                                                        Rentable    Rentable
                              Number of    Number of     Square      Square
                               Units as     Units as     Feet as     Feet as
                                  of           of          of          of        Square Foot     Square Foot
                              September    September    September   September    Occupancy %     Occupancy %
                 Number of       30,          30,          30,         30,      September 30,   September 30,
Location         Properties    2013 (1)       2012      2013 (2)      2012          2013            2012

Wholly-Owned
Properties
Arizona                   1          631          633      71,355      71,355            74.5 %          54.9 %
California                3        2,145        2,170     206,810     206,023            89.3 %          65.5 %
Florida                   4        3,169        3,235     330,805     331,005            94.8 %          75.7 %
Maryland                  3        2,661        1,677     274,287     172,035            65.7 %          70.3 %
Massachusetts             1          686          690      72,565      73,020            80.0 %          71.3 %
New York                  1          822          822     100,480     100,446            76.6 %          95.8 %
Utah                      1          503          316      59,300      40,610            90.8 %          90.5 %
Total
Wholly-Owned
in Lease up              14       10,617        9,543   1,115,602     994,494            82.5 %          73.5 %

Managed
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